On March 21, 2013, the U.S. House of Representatives adopted H.Con.Res. 25, a concurrent resolution establishing a budget for Fiscal Year 2014 and providing a budget framework for the next ten years. Under the terms of this budget, projected spending would be $4.6 trillion less than would be spent under current law. Federal deficits would be placed on a downward trajectory and the federal budget would be balanced by 2023.
In order to the achieve these goals, the budget would stop spending money we don't have to spend by reducing expenditures on low priority and unnecessary activities, reform the tax code to implement a pro-growth tax system that will promote the robust economic growth that fosters job creation and prosperity, make changes to important senior health programs to ensure that these benefits can be provided for many decades into the future, and bring reform to the Medicaid program so that it can deliver on its promise to those in need without becoming a financial drain on both state and federal budgets.
Of course, a budget resolution does not implement these changes, it only offers these ideas as an illustration of how to achieve the savings anticipated over the ten-year period. Each of these proposals, as well as many other policy ideas included in H.Con.Res. 25, will be debated and considered separately by both the House and the Senate. A budget resolution is important, nonetheless, because it establishes priorities and offers a path for achieving specific goals. H.Con.Res. 25 was adopted by the House by a vote of 221 - 207, with Rep. Tom Petri voting with the majority to adopt this plan. The Senate adopted a very different budget plan by an even narrower margin of 50 - 49 on March 23, 2013.
Why is it important to adopt a budget plan that reduces spending? Right now, it's important because federal spending far outpaces the revenue we collect in taxes, and we are borrowing enormous amounts of money to finance government spending. In each of the years between 2009 and 2012, federal deficits were in excess of $1 trillion dollars, adding a combined $5.4 trillion to our national debt. The projected deficit for the current year is forecast to be lower, but still, the federal deficit will be close to the $1 trillion level.
Already, the national debt (the combined amount of unpaid deficits over the years) is in excess of $16 trillion -- more than 100 percent of our national income as represented by our Gross Domestic Product (GDP). About two-thirds of this debt is held by public investors. This measure is significant as it is generally thought to represent the capacity of any nation to repay the funds it borrows.
At approximately 70 percent of GDP, the amount of federal debt held by public investors is troublingly high, but managable. The problem is not today, but where we will end up if we don't make changes of the scope proposed by the budget resolution adopted by the House.
The graph above illustrates the danger we face from rising debt levels. Even in 2013, we are approaching the level of debt (measured as a percent of GDP) taken on during World War II. During that national crisis, federal debt exceeded 100 percent as government spending was increased to meet the military challenge of the World War. This graph, based on projections made by the Congressonial Budget Office and the Office of Management and Budget, shows debt reaching 100 percent of GDP within the next decade and growing well beyond that level in the decades ahead. Borrowing of this magnitute is simply not sustainable, and it is time to turn away from living on borrowed money.
In recent years, budget cutting has focused on domestic discretionary spending. This is the portion of the federal spending that results from the annual appropriatons process by which Congress identifies spending levels for the various federal departments and agencies and determines which federal programs should receive continued funding. Some progress has been made in reducing discretionary spending, both now and in future years, but this part of the federal budget is less than half of total federal spending.
This next graph breaks down federal spending for Fiscal Year 2012. Total spending was $3.54 trillion, but of this total, only about 36 percent, or $1.29 trillion, was discretionary spending subject to the annual appropriations process. Other spending included Social Security, Medicare, Medicaid, interest on the national debt, and other mandatory spending on various federal programs.
If the federal government is to get its financial house in order by reducing its borrowing, moving toward a balanced budget, and reducing the national debt as a percentage of GDP, we need to focus on the mandatory spending side of the budget, which represents more than two-thirds of federal spending.
This next graph, based on projected future spending for interest as well as health and retirement programs, demonstrates which programs are expected to grow in cost, and therefore add increasingly to our debt. The future cost of Social Security, while expected to grow as a percentage of GDP, has the flattest spending trajectory, the chief reason that many believe its eventual reform to be more easily achieved.
The fastest growing component of government debt is the interest paid to those funding that debt. There is little we can do to lessen the burden of rising interest costs, except to reduce our overall spending and bring debt levels down to a more manageable level. Both Medicare and Medicaid spending, however, are also expected to grow significantly in future years. In fact, when combined with Social Security, these federal health programs (these figures do not include the additional federal spending anticipated as a result of health care reform) are expected to increase by 2040, reaching a level where all federal revenues would be spent on these three programs alone, leaving no resources available for interest payments and other federal priorities, including national defense. Clearly, this is not an outcome that anyone could desire.
Some might say that instead of all of the attention being paid to spending, we should spend more time thinking about the revenue side of the equation and give serious thought to increasing taxes, thus giving a boost to government revenues. Advocates of tax increases, of course, pursue this goal speaking only of taxing the higher earning taxpayers, thus protecting the broad majority from assuming a larger role in supporting current spending levels. Such advocacy continues, even after the adoption of a higher top individual tax rate and an increase in the rates for capital gains and dividend income for those same taxpayers. As enacted as part of H.R. 8, the American Taxpayer Relief Act of 2008, these recent increases are expected to bring in an additional $600 billion in revenue over the next 10 years.
Such advocacy raises an important question -- do we spend too much or do we tax too little? In the years since the end of World War II, federal revenues have averaged 18 percent of GDP, while federal spending has been approximately 20 percent of our economy. (This historic imbalance between spending and revenues goes a long way in explaining how we came to have a $16 trillion debt.)
It's true that during the recent recession and our painfully slow recovery, revenues have been below average, but spending has accelerated to previously unknown levels. In 2009, federal spending reached 25 percent of GDP, followed by 24 percent in 2010 and 2011, and 23 percent in 2012. According to the Congressional Budget Office, without significant changes to federal policy, spending will fluctuate between 21.5 and 23 percent of GDP, while revenues will return to historic levels by next year and stay in the range of 18 to 19 percent of GDP.
The graph above demonstrates that even after the tax increases enacted by the American Taxpayer Relief Act, spending remains the problem. In fact, the previously noted pressures from health costs will drive federal spending well beyond our current recent highs and push spending above 35 percent of GDP. This is why it is vital that action be taken now to reform these programs, because without such reform they will not be sustained.
It was in this context that the House adopted H.Con.Res. 25 as a budget framework for the next 10 years and beyond. Pursuing tax reform on the revenue side that will produce revenues of 18 or 19 percent of GDP and reforming spending policy so that it conforms to these revenue levels, the House budget adopted in March 2013 sets out a reasonable approach to both taxes and spending. While at the end of the day, the policy reforms taken to return responsibility to the federal budget may vary from those proposed in this budget, clearly the overall approach and goals of this legislation are critical to maintaining the strong economy needed to providing the greatest possible prosperity to the American people.
All graphs were prepared by the House Committee on the Budget using data from both the Congressional Budget Office and the Office of Management and Budget.